Senators Introduce Optional Federal Charter Legislation

Citing bipartisan support to revamp the insurance industry regulatory system, two U.S. senators today unveiled legislation that would allow life and property/casualty insurers to choose federal rather than state regulation under an “optional federal charter” system. United States Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.), both members of the Senate Committee on Banking, Housing, and Urban Affairs, introduced the comprehensive legislation – the “National Insurance Act of 2006” – on Wednesday, April 5.

The bill has been referred to the Banking Committee where hearings are expected to begin later this spring.

“Unlike the modernization of banking and securities of the late 1990s under the Gramm-Leach-Bliley Act, the insurance industry remains subject to a patchwork of state regulations that have stifled competition, innovation, and growth,” said Sununu. “The existing governing system spreads across more than 50 jurisdictions and has proven burdensome and expensive for all concerned. A more uniform regulatory environment mirroring the highly successful dual banking system is long overdue and stands to substantially improve the environment for those who buy, sell, and underwrite life and property and casualty insurance.”

An industry divided

The insurance industry has split over the advisability of creating a dual regulatory system with an optional federal charter. The life and financial services industry, some larger property casualty insurers and larger commercial insurance brokers generally favor the option while other property casualty insurers and independent agents oppose it.

The Independent Insurance Agents & Brokers of America said the association strongly opposes the National Insurance Act of 2006, introduced by Sununu and Johnson.

“There is no question in the insurance industry that the existing regulatory system needs comprehensive reform,” says Big “I” CEO Robert A. Rusbuldt. “Change is long overdue, and virtually every industry stakeholder agrees the existing system is a slow, inefficient patchwork of differing laws and regulations. The Big ‘I’ agrees strongly with the need to update the regulatory system, but a one-size-fits-all scheme that creates a new federal bureaucracy is not the answer.”

The Big “I” opposes OFC because agents believe local insurance regulation works better for consumers. They argue that establishing a dual state/federal system would be very confusing to consumers who may have some insurance products regulated at the state level and others at the federal level. Other reasons include: additional regulatory burdens on agents and brokers; the OFC could complicate solvency regulation; federal regulation could eventually threaten state premium tax revenue, critical funding heavily relied upon by the states for various purposes; and that the OFC could have a negative impact on state residual market mechanisms and other state funds.

The Council of Insurance Agents & Brokers, which represents large commercial property/casualty domestic and international commercial insurance brokers, supports the optional federal charter system.

“The current state regulatory system is a crazy-quilt of conflicting regulations, market conduct rules, pricing provisions, guarantee funds and other licensing provisions, to say nothing of layers and layers of bureaucracy,” said CIAB President Ken A. Crerar in a statement. “This approach is modeled after the dual charter system for banks, which has worked well and enhanced competitiveness in that part of the financial services sector.”

Crerar said if the United States hopes to be successful in pressing its case for open markets and free trade overseas, it must have uniformity and consistency in the regulatory environment of the 50 states.

In addition, he said, an optional federal charter would significantly improve the ability of regulators to monitor the solvency and financial stability of insurers.

“Insurance fundamentally is a promise between the customer and the company, a promise to pay if a claim is incurred. That promise means nothing if the company extending coverage is not financially sound,” he said. “Safety and soundness in a global marketplace can best be assured through a rational regulatory regime.”

Regulators’ view

State insurance commissioners have stated their opposition to the Sununu-Johnson approach.

“The nation’s state insurance officials share significant concern that this bifurcated regulatory regime with redundant, overlapping responsibilities will result in policyholder confusion, market uncertainty, and a host of other unintended consequences that will harm taxpaying individuals, families and businesses,” said the National Association of Insurance Commissioners President Alessandro Iuppa. “However, a new proposal unveiled today by Senators Sununu and Johnson would fundamentally dismantle the current system and allow insurance companies to opt out of state oversight and policyholder protections.”

Iuppa said that the NAIC strongly believes that a “coordinated, national system of state-based insurance supervision has and will continue to meet the needs of the modern financial marketplace while preserving protections for individual and commercial policyholders.” He added that state insurance officials are working to continuously retool and upgrade state supervision to provide multi-state platforms and uniform applications to leverage technology and enhance operational efficiency.

But their efforts to modernize the insurance regulatory system are not quick enough, said Sununu.

“State commissioners may have hoped to achieve uniformity and market-based reform within the state regulatory scheme, but those improvements have simply not occurred and are not expected in the near future,” Sununu said. “Streamlining an overwhelming and tangled web of state rules for financial regulation, licensing, policy forms, rates, and market conduct exams under an ‘optional federal charter’ system will encourage greater competition. Moreover, new and innovative insurance products will become available to the consumer more quickly.”

“Optional charter means just that – it is optional,” CIAB’s Crerar said.

“There is broad consensus that it is time for regulatory reform of the insurance system to address inefficiencies and inconsistencies,” Sen. Johnson stated. “The National Insurance Act of 2006 is about choice. Consumers should have the benefit of the greatest array of product choice the industry can provide and insurance companies should have a choice between state and federal regulation.”

Insurers for OFC

The American Insurance Association, a strong supporter of the National Insurance Act, says the legislation would allow consumers to reap the benefits of a modernized market-based insurance system by providing property/casualty insurers the option of being nationally regulated.

“Consumers will be empowered by this legislation because it would create a healthy insurance environment that fosters increased competition and product innovation, rather than the present patchwork state regulatory system, which has not kept pace with the marketplace needs of the 21st century,” said Marc Racicot, AIA president.

According to AIA, the streamlined, rational regulatory system called for in the legislation will result in increased efficiency, more choices and enhanced convenience for consumers while preserving the state regulatory system for those insurers wishing to remain state-regulated can do so. “The legislation is based on a model that has been proven successful for more than 100 years – the national/state banking regulatory system,” the AIA said in a statement.

“Consumer protection would be ensured because the national regulatory structure would focus strongly on one, insurer solvency to make sure consumer claims can be paid, and two, market conduct to identify and quickly deal with bad actors. These are the most meaningful forms of consumer protection,” Racicot said.

Insurers opposing OFC

Opponents of a federal charter prefer the approach taken in another bill, the State Modernization and Regulatory Transparency or SMART Act. The SMART Act calls for streamlining state insurance regulation instead of creating a separate federal option.

Ernie Csiszar, president and CEO of the Property Casualty Insurers Association of America, says “the positive elements of the OFC proposal can be incorporated into a much less intrusive concept – the SMART Act – that would preserve state regulatory authority but would establish federal standards for key areas of oversight, such as rate and form regulation and market conduct, that would make the system work better for insurers, agents and brokers, and consumers.”

“While initial information about the proposed OFC legislation indicates that the bill contains several important free market provisions, it is important to remember that the measure is likely to be drastically changed as it undergoes congressional scrutiny,” Csiszar said. “PCI remains concerned about the establishment of a new federal bureaucracy with far-reaching authority over the insurance industry that is subject to the political whims of Congress.”

“Federal regulation has proven no better than state regulation at addressing market failures or protecting consumer interests and, unlike state regulatory failures, federal regulatory mistakes can have disastrous economy-wide consequences,” said NAMIC Federal Affairs Senior Vice President David A. Winston.

“The insurance industry is not a monolith,” said Winston. “Life, property/casualty and health are all distinct businesses with different concerns.”

Winston notes that life insurers are seeking a federal charter option because they sell products, such as annuities, that compete with bank and securities products. In contrast to the life insurance business, the property/casualty business is much more locally-based and not subject to competition from banks and securities firms. States have been the sole regulator of most insurance products throughout U.S. history.

“State regulation has not been perfect,” said Winston, “but the states have been working hard to address legitimate issues of concern.

“A significant concern for NAMIC member companies is that while proponents of federal regulation may design a ‘perfect system,’ they can neither anticipate nor prevent the imposition of disastrous social regulation in exchange for the new regulatory structure,” said Winston. “We fear that such regulation could ultimately make coverage less available and affordable for most consumers. We would much prefer that the states continue to work together to achieve greater regulatory uniformity.”